Legislation removes some uncertainty on estate taxes

The recent “fiscal cliff” legislation provides small businesses and farms some much-needed relief from uncertainty about estate taxes, says a University of Missouri Extension agricultural economist.

“We were scheduled to drop the estate tax threshold from $5 million to $1 million on Jan. 1, but they extended the $5 million level,” said Ron Plain. “So now estate taxes start on inheritances greater than $5 million. The other thing Congress did was cap the tax rate at 40 percent.”

The top tax rate on estates had been scheduled to increase from 35 percent to 55 percent.

Also, unlike past legislation on estate taxes, which extended lower rates for a limited time, these changes have been made indefinite, Plain said.

Plain says that while farmers have a lot of assets in terms of land and equipment, limited cash income means that estate taxes can be a problem. By leaving the exemption at $5 million, a lot more family farms will be able to transfer from one generation to the next without getting a huge tax bill, he said.

However, because of rising land values, the $5 million exemption may not be enough to shield some family farms from estate taxes, Plain added.

“For the typical farm, 70 percent of all the investment is in land,” he said. “So if you have a father-son operation or siblings farming together, you can very quickly get above that $5 million threshold and face some sizable estate taxes.”

Plain recommends exploring different estate planning options with a tax professional in order to be able to pass on the family farm while holding estate taxes at a manageable level.